ORDER
1. This is an appeal filed by the revenue against the order of CIT (Appeals) dated 23-1 -2006 for the assessment year 2001 -02, in the matter of order passed under Section 143(3) of the Income Tax Act, 1961 wherein following grounds of appeal have been raised :
On the facts and in the circumstances of the case and in law, the CIT (Appeals) erred in
(i) allowing deduction under Section 80-IB of the Income Tax Act, oninterest income on margin money deposited with bank for openingletter of credit and obtaining bank guarantees for business.
(ii) the appellant craves leave to add, to alter, or amend any ground of the appeal raised above at the time of the hearing.
2. Rival contentions have been heard and record perused. Brief facts in this case are that the assessee-company is engaged in the manufacture of tele-communication equipments. The assessee claimed deduction under Section 80-IB of the Act @ 30% of the eligible profits. During the course of assessment under Section 143(3), the assessing officer observed that assessee is claiming; deduction on the basis of profit as per profit and loss account whereas deduction under Section 80-IA of the Act is available on the eligible profit only i.e. the profit from manufacturing activity of eligible unit. The assessing officer assessed interest income on FDRs with banks against margin money and corporate loans, as “income from other sources” instead of eligible business profits claimed by the assessee. Accordingly, deduction under Section 80-IB was declined on the interest income.
3. By the impugned order, CIT (Appeals) allowed assessees claim of interest income by observing that assessee was required to invest in FDRs for margin money not for the sake of earning income from investment of surplus funds but as a mandatory requirement in order to obtain orders for sale. It could not have fluctuated tenders without filing bank guarantee and without these bank guarantees, it could not have obtained any orders. Accordingly, he held that these FDRs were purchased out of business compulsion and were inextricably linked with the assessees business activities. The interest income of Rs. 34.91 lakhs was thus held to qualify for inclusion in the profits of the business for the purpose of computing deduction under Section 80-IB of the Act.
4. Aggrieved by the above order of the CIT (Appeals), the revenue is in appeal before us. It was contended by the learned Sr. DR Shri R.L Meena that by no stretch of imagination interest earned on bank deposits can be said to have derived from industrial undertaking, so as to qualify for special deduction under Section 80-IB of the Act. He relied on the proposition laid down by Honble Supreme Court in case of CIT v. Sterling Foods , wherein the Honble Supreme Court has held that “there must be, for the application of the words derived from a direct nexus between the profits and gains and industrial undertaking”. As per learned DR in the present case, the earning of interest was incidental to the business of the assessee, therefore, CIT (Appeals) was not at all justified in treating such interest income, as directly flowing from the industrial undertaking for allowing claim of deduction under Section 80-IB of the Act.
5. On the other hand, learned AR Shri R.S. Singhvi vehemently argued that assessee-company was exclusively engaged in the business of tele-communication equipments as an industrial undertaking and the entire income was covered for the statutory deduction under Section 80-IB of the Act. As per learned AR, deposit to the bank was given as a business compulsion and not as per a sweet will of the assessee, and the same was meant for obtaining bank guarantee, LCs etc. without which it is not possible to think of carrying on of manufacturing and sale of telecommunication equipment the business. He further contended that in the grounds of appeal, the revenue has not disputed the findings of CIT (Appeals) about the interest as business income. There was no dispute that assessee was an industrial undertaking, entire income was covered for statutory deduction under Section 80-IB, and receipts of interest on FDRs purchased out of borrowed funds as a matter of business compulsion and expediency, is in the nature of business, the benefit of deduction under Section 80-IB should have been allowed. He draw our attention to the language of Section 80-IB which reads as “where the gross total income of the assessee includes any profit and gains derived from any business referred to in Sub-section (3) to (ii), (iiA) and (OB)….” Mr. Singhvi further contended that on identical facts, benefit under Section 80-IB has been allowed in the preceding year1, therefore, revenue cannot be allowed to change its stand, without there being change in the facts and circumstances during the year under- consideration. He further submitted that even otherwise there is no infirmity in the order of CIT (Appeals), as benefit of netting is to be allowed even as per the decision of Honble Delhi High Court in case of CIT v. Shri Ram Honda Power Equip. Ltd. . The purchase of FDRs were out of borrowed funds, therefore, there is on reason to decline netting of the interest expenditure out of the interest income, while bringing the net interest income for taxation under the head “Income from other sources”. He further relied on various decisions of the following co-ordinate Benches, wherein bank interest income was considered as inextricably related to carrying out on business of industrial undertaking and considered for deduction under Section 80-IA of the Act:
1. Assistant Commissioner v. Maxcare Laboratories Ltd. (2005) 92 ITD 11 (Ctk.)
The bank interest income was considered as inextricably related to carrying out on of business of industrial undertaking and considered for deduction under Section 80-IA.
2. Samtex Fashion Ltd v. Asstt. CIT (2005) 92 ITD 535 (Delhi)
The interest on margin money with the bank was considered as exempt under Section 10A.
3. Centex Publication (P.) Ltd. v. Dy. CIT (2003) 133 Taxman 42 (Delhi)(Mag)
The interest income was considered as derived from industrial undertaking and eligible for deduction under Section 80-L
4. Picric Ltd v. Jt. CIT
The interest on fixed deposit with the bank towards various credit limits considered as derived from an attributable to business and benefit was allowed under Section 80HHC.
5. Leather age v. ITO (2003) 86 ITD 4822 (Luck)
The assessee is a export oriented unit – Interest on FDR was considered as business income.
6. CIT v. Punit Commercial Ltd. (Mum)
The assessee is a 10096 export oriented unit – Interest on FDR was considered as business income.
7. CIT v. SSC Shoes Ltd
The interest on bank deposit considered as business income and benefit was allowed under Section 80HHC.
8. CIT v. Sharp Industries
Interest income is eligible for deduction if it is included in the computation of profits and gains of the business.
6. We have considered the rival contentions carefully gone through the orders of the lower authorities and deliberated on the case laws cited by the learned AR and DR in the factual matrix of the case. There is no dispute to the fact that deposit was given by the assessee for securing bank guarantee and LCs, which was meant for the purpose of business. There is also no dispute that bank deposit was given out of the borrowed funds as per the abstract of bank statement placed before the lower authorities. The issue regarding receipt of duty drawback on the raw material utilized as in-put by the assessee, whether income derived from industrial under-taking so as to be eligible for deduction under Section 80-IB has been examined by the jurisdictional High Court in case of CIT v. Ritesh Industries Ltd. , wherein it was held that such duty drawback may constitute profits or gains of the business by virtue of Section 28, but, it cannot be constituted as profits or gains “derived” from the industrial undertaking for, its, immediate and proximate source is not the industrial undertaking but the scheme for duty drawback. On account of duty drawback, business profits may be increased, but so far as profits and gains are concerned, it cannot be said to be “derived” from an industrial undertaking, it will not increase. It will remained the same. Similar view has been taken in case of CIT v. J.B. Exports Ltd. by the Honble Delhi High Court, wherein decision of Madras High Court in case of CIT v. Jameel Leathers & Uppers (2000) 246 ITR 973 (Mad) was followed. Similar view has been taken by the Punjab & Haryana High Court in case of Nahar Export Ltd. v. CIT (2006) 288 ITR 494 (P&H).
7. The issue regarding treatment of interest income while computing deduction under Section 80HHC has been elaborately considered by the jurisdictional High Court in case of Shri Ram Honda Power Equip. Ltd.s case (supra). The provisions of Section 80HHC also provides for deduction of income “derived from” from export, similarly, Section 80-IB also envisages deduction in respect of income derived from industrial undertaking. The words “derived from” have been used in the same spirit in both the sections. We can safely apply the broad principles laid down in case of Shri Ram Honda Power Equip. Ltd. (supra), to the cases where interest income is claimed as deduction under Section 80-IB of the Act. Broad principles for determining the nature of interest income, as to whether such interest income is “business income” as computed under Sections 28 to 44 of the A Act or income from other sources as determined under Section 56 read with Section 57 of the Income Tax Act were laid out. The first category of such interest income was held by the Honble High Court as arising out of parking of surplus fund, such income is to be treated as income from other sources. The second category of cases are those where assessing officer himself treats the interest income as income from business, on the plea that such interest income was inextricably linked with the export business. Here we are concerned with first category where assessing officer treats such income as not related to business of exports but as income from other sources. However, the Jurisdictional High Court in such situation have held that these receipts merits separate treatment under Section 56 of the Act which is outside the ring of profit and gains from business and profession. The court has further provided that to give effect to this position, the assessing officer while computing the profits of the export business will have to remove: from the debit side of the profit & loss account, the corresponding interest expenditure that had been “laid out” to earn such income from other sources. Otherwise, this will depress the profit by an amount which is out of reckoning of Section 80HHC, a consequence not intending to be brought about. Following is the relevant observation of the Honble High Court at para 19 :
We are therefore of the view that where surplus funds are parked with the bank and interest is earned thereon it can only be categorized as ” income from other sources. This receipt merits separate treatment under Section 56 of the Act which is outside the ring of profit and gains from business and profession. It goes entirely out of the reckoning for the purpose of Section 80HHC. To give effect to this position, the assessing officer while computing profits of the export business will have to remove from the debit side of the profit & loss account the correspon ding interest expenditure that has been laid out to earn such income from g other sources. Otherwise this will depress the profits by an amount which is out of the reckoning of Section 80HHC, a consequence not intended to be: brought about.
8. It is quite clear from the above proposition that if the assessee has incurred any expenditure for making the FDRs, interest income of which is brought to tax under the head Income from other sources, such interest expenditure is to be taken out from the profits of export business, and at p the same time such interest expenditure is to be deducted while arriving at net income from interest on bank deposit.
Taking out such interest income and interest expenditure out of the profit & loss account prepared for computing export profits, will change such export profit, therefore assessing officer is to recalculate permissible deduction under Section 80HHC with reference to such revised export profits. On the other hand, such interest expenditure is to be allowed as a deduction while computing net interest income to be taxed under Section 56 as income from other sources. In the instant case before us the assessing officer founds that the assessees claim for treatment of such interest income as business income was found to be not tenable. Thus, there is no dispute that such interest income is liable to be assessed as income from other sources. In view of the proposition laid down by Jurisdictional High Court as discussed above, the assessing officer is required to exclude any interest expenditure if any relatable to such income from the profit & loss account of industrial undertaking. At the very same time such interest expenditure is required to be reduced from the interest income for bringing the net interest income to tax net under Section 56 of the Income Tax Act.
9. In view of the above discussion, we are inclined to agree with the learned DR Shri R.L. Meena that interest income cannot be said to have been derived from industrial undertaking so as to make it eligible for deduction under Section 80-IB of the Act. However at the very same time we are inclined to modify the orders of both lower authorities and direct the assessing officer to allow netting of interest expenditure while arriving at the net interest income to be brought to tax as “income from other sources” under Section 5,6 of the Income Tax Act, 1961. The assessing officer is further directed to recalculate the deduction under Section 80-IB by excluding the interest expenditure out of the P & L account prepared for its business of industrial undertaking. We direct accordingly.
10. In the result, the appeal of the revenue is allowed in part, in terms as indicated hereinabove.